CNET reports that the US Securities and Exchange Commission is
investigating companies for deception thanks to their use of pro
forma financial results. As an example of the dramatic difference
between pro forma and the results showing using the Generally
Accepted Accounting Principals (GAAP) standard, this article points
at Red Hat, which either had a $600,000 profit or a net loss of
$27.6 million this past quarter... the company's first profitable
quarter ever, according to the press releases. Please note, so
there's no ambiguity at all, that this article does not say that
Red Hat's under investigation.
"There are other reasons behind the popularity of pro
forma numbers. For one, companies want to stay in line with what
their competitors are doing.
"If you're a new entrant in an industry where competitors are
valued on a cash basis, you'll do it too," said John Corcoran, the
Internet and digital new media analyst at CIBC World Markets. "You
don't want to be the only one putting out a 50 cent per-share net
loss, while your rivals are reporting 8 cent pro forma profit."
The same holds true for the analysts. "There are 45 people who
follow AOL. You can't have 10 looking at one thing and 10 looking
at something else," Corcoran said."
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